Weekend Strategy Review July 3, 2022

Posted by OMS  at July 3rd, 2022

Stocks started the day lower on Friday, but after refusing to exceed Thursday’s low, began a nice, broad based rally into the close.  After being down 288 points early, the Dow finished with a gain of 322 points at 31,097.  The NASDAQ and S&P finished with gains of 99 and 40 points, respectively.  For the week, the Dow lost 409 points; the NDX and S&P lost 409 and 86 points. Volume was extremely low during the week which should set the stage for a rally next week.

In Tuesday’s and Thursday’s Comments I discussed two potential scenarios for the Dow.  My primary scenario being an a-b-c move in which the Dow would decline to the 30,600 – 38,000 level for wave ‘b’ down followed by a rise toward the 32,000 level into mid-June.  It appears that that scenario is right on track, as the Dow declined to 30,431 on Thursday to complete wave ‘b’ down, then attempted to go lower on early Friday before starting wave ‘c’ up.  The choppy down-up action was typical of a retracement wave and suggests higher prices as the market moves into the major turn window scheduled for 15-20 July.

The major thing that occurred during the week was that the market did not make a major impulsive move down.  This was my second scenario; that Thursday’s initial decline was the start of wave 3 of Wave 3 down. But once the decline was checked, it was soon obvious that wave 3 of Wave 3 down was not taking place. If wave 3 down was starting, the Dow would have continued lower, probably dropping 800 to 1,200 points each day.  But that didn’t happen, so I must conclude that my primary scenario is taking place.  I mention this today so students can understand the importance of looking for impulsive moves at the start of a major Wave 3 down.  If the move isn’t impulsive, it’s not a wave 3.  Like I said before, you’ll know it when you see it.  Just wait a few weeks….

OK, now that we know Wave 2 up is not finished, the obvious question is how high can it get before it completes?  Hmm?  Well, for starters, we know that wave ‘c’ up should be at least as high as wave ‘a’ up.  Looking at the chart, we can see that wave ‘a’ up topped on 28 June at the 31,885 level. So, for now I’m going to use 31,885 as my minimum upside target. For my maximum upside target, I see a ton of resistance from the series of lows that occurred between 27 May and 7 June near the 32,500-32,600 level.  I do not believe the Dow has enough steam to break above those lows.  So, my upside target range for wave ‘c’ up is between 31,900 and 32,500. My upside wave ‘c’ target on the S&P is near the 4,200 level.

While the odds for reaching these targets are higher than normal because of the developing patterns, there are no guarantees that they will be reached.  Remember we’re dealing with a wave 2, and as most of you know, these waves can truncate at any time.  The important thing to understand from all of this is that once wave ‘c’ of Wave 2 up completes, probably sometime in mid-July, the market should start another plunge type decline.  This decline should be a series of wave threes down.  By this I mean the decline should consist of several wave 3s down that are occurring within different trend patterns. The decline will likely catch a lot of investors by surprise and cause a lot of pain. I’m still looking for a move down to the 26,500 to 28,000 level, possibly as low as 25,000 before all the sub-waves of Wave 3 down are complete.  Please be careful.

The Dean’s List is still negative. The Tide has turned positive.

The Market Timing Indicators on the Dow and S&P (SPY) remain negative. The same indicators for the NASDAQ and RUT are neutral. 

The Scalp Trading Indicators on the Dow, S&P (SPY), and RUT are neutral.  The same indicators for the NASDAQ (QQQ) are negative.

The Sector Ratio strengthened to 4-20 negative. The top four strong sector are Telecoms (2), Retail (2), PharmaBio (1), and Household Products (1). The top five weak sectors are Energy (-5), Real Estate (-5), Material (-5), Media (-5), and Semiconductors (-4). Continue to avoid these weak sectors as they will likely lead the market lower as Wave 3 down unfolds.

My Doctors Trade with TZA generated a confirmed Red Arrow on yesterday’s final bar.  However, before the Red Arrow was generated, I was taken out of the trade buy the stop I mentioned in Thursday’s Comments. Given that my primary scenario was calling for the market to rally once wave ‘b’ down completed, I placed the stop which saved me a few bucks.  I will look to re-establish this trade on the next Green Arrow.

Still no change in my comments on Bonds, crypto, or gold. I still don’t see any reason to own them now. BTW, Bitcoin and others like it, continue to face all sorts of issues as the Fed tightens its policy to fight inflation. Last week, Bitcoin fell to the $21,000 level which is only a few $K above the cost to mine it. Many of the Bitcoin miners are currently trading at levels near or below $5 per share.  Most of you know how I feel about stocks trading under $5.  Many of these issues (most) go bankrupt!  The economic conditions for crypto currencies are NOT favorable now, and owners should not expect to be rewarded in the near term.  Right now, crypto is extremely oversold, so there could be a short-term bounce.  But the current bear market and deteriorating economic conditions will prevent any sustainable rally in the crypto currencies. Longer term, crypto assets still have significant potential, but with RIOT at 4.25 and MARA at 5.54, there is a clear and present danger of bankruptcy in these assets. They might not survive the Bear winter I see coming. GBTC first generated a Red Arrow on 22 November 2021. The indicators have remained negative, except for a brief rally in March, ever since. Continue to avoid all things crypto like the plague!

Best Bets:  Normally, when I expect the market to rally for a week or so, I’d be going to the Member’s Watch List to pick a few runners.  But after looking at the List, I just don’t see anything that I believe is a stand-out favorite.  The majority of the RS ratings for the stocks on the List are just too weak for me to use them.  So, I’m going to pass.  Instead, I’ll be looking to trade a few of the positive leveraged index ETFs, like UDOW, and TNA.  That way, if I’m trading them to the upside and I see that they are starting to reverse, it will get my attention when Wave 3 down begins.  I don’t want to miss Wave 3 down and will start to position myself for the decline as the Dow approached some of my minimum targets. This is a case where I’d rather be early with some of my bets than late.

Protect yourself!

Have a great weekend.

That’s what I’m doing.

h

Market Signals for

07-05-2022

DISCLAIMER

As always, the Professor never makes recommendations. The information is provided on an educational basis so you can have informed discussions with your financial advisors and/or accountants about your individual investment decisions.

All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.